Ford (F) stock seems poised to rise significantly over the medium term, as the company should benefit from the strong U.S. auto sales market. Moreover, the company’s valuation is attractive, and the Ford dividend yield is nearly 4.5%, so investors who buy Ford stock will get paid handsomely to wait for the current market weakness to dissipate.
The U.S. auto market is obviously quite strong, with America’s auto sales beating expectations last month. The industry’s seasonally adjusted annualized rate, or SAAR, came in at 17.5 million, versus the 17.3 million expected by analysts.
The SAAR was the highest since 2005 and indicates that U.S. automakers will sell 17 milion cars this year, a level that hasn’t been reached since 2001.
Ford was among the major beneficiaries of the strong month, as the company had its highest U.S. August sales in nine years. U.S. sales increased 5% to 234,000, even though Labor Day weekend fell in August last year vs. September this year. Meanwhile, Ford’s sales of SUVs, which tend to be more profitable than passenger cars, reached the highest level in 12 years, the company reported.
Ford Stock Still Strong
During Ford’s second-quarter earnings conference call in July, the automaker said that its European business was on track to becoming profitable, and reported that its overall Asia Pacific business was strong. The company forecast that its results would improve in the second half of the year versus the first half.
Of course, the elephant in the room is China. Will weak China auto sales sink Ford stock? Ford’s China sales fell 6% in July to 77,100, representing the company’s third straight month of declining sales in the country.
But 77,000 vehicles isn’t much compared with the 234,000 vehicles the company sold in the U.S., so continued single-digit percentage declines in China shouldn’t affect the company’s bottom line significantly, especially if its U.S. auto sales continue to rise. Additionally, according to research firm Trefis, Ford “has adjusted its spending in China in order to optimize its profits from the region.”
Trefis predicted that Ford would report strong results in the second half of this year, driven by the elimination of supply shortfalls of its F-150 SUV and solid overall SUV sales. The firm also sees positive catalysts for Ford in Europe, as it says that more profitable retail and fleet channel sales account for a higher percentage of the company’s total sales, while the launch of the Ford Mustang should cause sales on the continent to rise.
Despite its strong U.S. sales and relatively low exposure to China, Ford stock has dropped 10% in the past three months, and F stock is trading at roughly 7 times analysts’ consensus 2016 EPS estimate, versus 8.5 times for Toyota (TM) and 10 times for Nissan (NSANY). And again, you can’t overappreciate the 4.5% F stock dividend yield.
Investors should snap up Ford stock in the wake of its decline.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
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